How to Avoid Embezzlement

By Michael Schneider, president of Fluidesign, Inc.

It should have been a warning sign when, over lunch at a swanky Los Angeles restaurant, my new partner gave me the stupendously unsavvy advice, “Never put anything in writing.” It should have been a warn­ing sign when that same advice maven’s flashy car disappeared. But, I ignored the warning signs until it was too late. Only then did I learn that my new partner applied his aforementioned mantra to our company… and I would have to pay the price.

What seems so painfully obvious to me now was difficult to ascertain in January 2000 when I first met Martin Shuman (name changed to protect the “innocent”). I was in the second semester of my fresh­man year at the University of Southern California (USC) and had gotten the ball rolling quickly at my company, Fluidesign. Things were looking good, and Shuman’s company quickly became a substantial client of Fluidesign.

But, Shuman wanted to be more than a good client. He wanted a piece of the action. I was 19 — I could not legally buy a drink — but I could sign over half of my company to a 29-year-old with an uncanny ability to schmooze. I did just that.

“I took the bait, with dreams of retiring before my 21st birthday.”

Shuman planned to leverage his existing relation­ship with a billionaire Los Angeles businessman into a deal that would net Fluidesign a partnership and an IPO within six months. It would also net us mil­lions (upon millions) of dollars. I took the bait, with dreams of retiring before my 21st birthday.

At first, things were wonderful. Shuman introduced me to the pillars of the Los Angeles business world and Fluidesign moved into a gleaming new office with his sister as our bookkeeper. By the time Shuman gave me that alarming piece of advice — never put anything in writing — I should have had a feeling that something was not right. But hey, we were having fun.

A few months later, he asked for access to Fluidesign’s merchant account, as he could not get one due to a bank error. Like his “unnecessary” car that was actually repossessed, there was no bank error, just horrifically bad credit. I became weary of his motives but relented with what I thought was a fail-safe.

In May 2001, I got him to do exactly what he had advised against: I made him sign a contract stat­ing that he would be personally responsible for any charges run through Fluidesign’s merchant account on his behalf. While abroad, I received a telephone call from my bank saying that there had been an abnormal amount of activity on the company’s mer­chant account. I questioned Shuman about this and was assured that he could back up every charge.

I flew back to L.A. and discovered that all of the charges Shuman had processed were being disputed (in excess of US$25,000), and that Shuman (with his sister’s help) had emptied Fluidesign’s bank account. That was it. Shuman disappeared. He no longer took my telephone calls and never came back to the office. Luckily, I knew an excellent and inexpensive lawyer— my father.

A year and a half later, I had repaid all of Fluidesign’s debts, settled all outstanding lawsuits and put the company back on track. It was then that I learned the most painful lesson of all: Even if you are right, and even if the court says you should be repaid, you will not necessarily see your money.

“I learned not to ignore the most basic human tool: instinct.”

With the benefit of hindsight, I am pleased this unfor­tunate experience occurred at such an early stage in my business career. What cost me about US$60,000 then would cost me 10 times that figure today. I also gained lessons that will last a lifetime. I learned not to give away equity but to make people buy it. It shows that they believe in it. I learned not to view a partner’s actions in a vacuum. If someone is disin­genuous with his partner, he is surely the same way with his customers and other business associates. I learned not to ignore the most basic human tool: instinct. No amount of promise, no matter how sweet it sounds, is worth going against your gut.

I also realized that most people believe what they want to believe. At the time, I wanted so badly what Shuman promised that I compromised my core value system. I ignored all the warning signs. I learned that in the end, honesty and ability are what take you places, and there is no substitute for either one. Oh, and one more thing… Never trust someone who says they don’t need a car in L.A.